Tax Benefits for Education

In case you’re one of the many who have been putting if off, you now have about 6 weeks left to file your 2010 income taxes. As you search high and low for credits and creative deductions, don’t forget to take advantage of the tax incentives available for higher education.

Several options are available for people currently in school. The American Opportunity and Lifetime Learning Credits of up to $2,000 are available for tuition and related education expenses including fees, books, supplies, and equipment (only the Lifetime Credit applies to grad students). This is a great deal because, being credits, the amount of tax you owe will be directly reduced. Another option is the tuition and fees deduction of up to $4,000 in educational expenses. You cannot double-dip, however, and should figure out whether the credit or deduction gives you the most benefit. Some good news – educational expenses paid from student loans do qualify for both of these options. For those of you who are still paying loan interest on your undergrad loans or diligently keeping up with current interest, don’t forget to take the student loan interest deduction of up to $2,500. Both of these deduction options are taken as adjustments to income, which means itemization is not necessary.

Admittedly not as applicable to us right now, the IRS also provides tax incentives for education saving. Although contributions are not deductible, deposits of up to $2,000 per year to Coverdell Education Savings Accounts grow tax free until they are distributed. These accounts can also be used for certain elementary and secondary school expenses. Generally when someone receives student loan payment assistance or loans are forgiven, a taxpayer must include the forgiven amount in their income. However, this income may be considered tax-free when you work for certain time periods, in certain professions (like public service), or for certain classes of employers. Qualified Tuition Programs (QTPs), also called 529 Plans, allow you to prepay for postsecondary education with the qualified distributions being tax-free. Early distributions from IRA’s (prior to age 59 ½) usually trigger a 10% additional tax fee; however, this additional tax is waived if the distributions are used for higher education expenses. You may still have to pay traditional income tax on the withdrawal. The interest earned on certain savings bonds will not be taxed when used to pay for qualified education expenses, and benefits of up to $5,250 from employer-provided educational assistance can be excluded each year. Finally, certain business deductions can be taken for work-related education.

The details of some of these tax treatments can get pretty sticky and there are restrictions on concurrent use, however, it is worth figuring out how to make these options work for you. I know I can use every penny I can get, and it's still not enough! For more details on all of these tax benefits for education, refer to IRS Publication 970: http://www.irs.gov/publications/p970/index.html